top of page

Normalize Stock Market

Issue
 
   The intent and purpose of the stock market is to allow for the purchase of stock in order to become a co-owner in a particular business, while also providing companies extra capital. Stock ownership is mutually beneficial of where both sides may profit from the arrangement.

   However, investors have misplaced or ignored their moral obligations as being co-owners of a business, which have resulted in the stock market being abused by traders (and corrupted by greed). This behavior is unethical to say the least since ownership in the particular company is legitimate and certain responsibilities and obligations are expected as being a co-owner of the business.
Unethical Behavior (Abuse)
 
   What constitutes as unethical or abusive behavior in the stock market?
 
   Day traders buy and sell stock without regard to the ownership of a particular business and, as such, have no real interest in being a co-owner in the company. They likewise have no hesitation towards abandoning that business relationship on a moment's notice, and do so for any given reason.

   This conduct of buying/selling as a day trader constitutes as abusive in nature, since there was no real intent of being a legitimate owner in the business that is associated with the purchase of stock. Because of this, day trading should be banned and those involved in such activity should be held liable for the unwarranted loss of value of one's shares.

   Another example of abusive behavior is high-speed computer trading since millions of trades are performed in less than a second, without the responsibility of being a co-owner in the business. Sector rotation is another form of abuse since it occurs during a specific season (e.g., an energy company during the winter) with shares being traded during certain times of the year rather than being due to a responsible owner in the business.

   Momentum investing, panic selling, and the annual re-balancing of one's stock portfolio are other examples of abusive behavior, since they all disregard the responsibilities of being a co-owner in the business.

   The key to understanding on whether a given practice is abusive or not is ownership. If an investor's behavior is uncharacteristic of being a co-owner in the specific business, then such conduct constitutes as being abusive in nature and should be prohibited in the stock market.
Rule of Thumb

   Perhaps, a general rule of thumb for investors to follow when selling stock is if they would "quit their job" for the same reason. In other words, when selling stock, the investor is giving up their stake as a co-owner in the business and is essentially "quitting their job" with the company.

   In practice, investors should ask themselves this rule of thumb to help distinguish the legitimate sale of stock from an abusive one. For example, would you quit your job if your employer's stock dipped below its 200-day moving average? If not, then it is not a valid reason to sell stock or you may be held liable for damages by the other shareholders.
Solution

   Perhaps, a simple way to prevent abusive behavior in the stock market would be to impose a 10-year restriction before a stock may be sold from its original purchase date.

   By having this restriction, the policy will inhibit the frivolous selling of stock that typically occurs within the first year of ownership (e.g., day trading, high-speed computer trading, momentum investing, sector rotation, annual re-balancing of portfolios, etc., that all occur within the first year).

   This policy also provides a certain degree of protection against future market crashes since investors would need to consider buy-and-hold strategies in 10-year intervals, which will stabilize the market by a certain degree.

   A sell-off may result every 10 years however, this downturn may be curtailed with a corresponding policy of organized withdrawal that only permits the selling of 15% of one's holdings per year after the 10-year period has expired (with hardship withdraws being exempt). That way, investors may sell a portion of their stock for the purposes of collecting profits, but not do so at the expense of causing a market crash every 10 years.
Other Considerations

   As an alternative, since mutual funds consist approximately 90% of the money in the stock market, perhaps a simpler solution is to set the maximum turnover ratio for all funds to be less than 5%.

   Limiting the turnover ratio for mutual funds in this manner will also determine the maximum drawdown for the market in any given year (since mutual funds pretty much dictate its direction). For example, placing a 2% turnover limit on mutual funds would mean that the stock market may lose approximately 2% for the entire year.

   With this simple turnover rule in place for mutual funds, we may be able to achieve a stable stock market despite its abuses and without the necessity of employing a 10-year restriction policy with organized withdrawal measures in place.
bottom of page